Yesterday the U.S. Securities and Exchange Commission adopted final rules that amend the definitions of “accredited investor” and “qualified institutional buyer” which are central to classifying investors that may participate in private offerings and investments under federal securities laws.
A company wishing to offer or sell securities to the public must register those securities with the SEC unless an exemption from registration is available under federal securities laws. The registration process is intended to protect investors by providing regulatory oversight and requiring the public disclosure of key information about the offered securities, but it is often lengthy and costly. As an alternative, many companies seek to raise capital with unregistered securities pursuant to an available exemption.
Regulation D is a section of the Securities Act of 1933 that establishes safe harbor exemptions routinely used by companies to issue unregistered securities in a private placement. The term “accredited investor” is used in Regulation D to classify a type of investor that is eligible to participate in an unregistered offering, and generally means a sophisticated investor with a relatively high income and net worth. The term was first introduced in 1982 and with limited exception its definition has not been updated since that time.
The SEC’s stated goal in adopting the accredited investor amendment is “to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933”.
Yesterday’s amendments to the accredited investor definition effectively broaden the scope of investors that are eligible to participate in Regulation D unregistered offerings. The amendments include:
- the addition of a new class of accredited investors that are individuals holding, in good standing, certain professional certifications or credentials issued by an accredited education institution (such as holders of the Series 7, Series 65 and Series 82 licenses);
- for investments in a private fund, the addition of a new class of accredited investors that are individuals who are “knowledgeable employees” of the fund;
- an expansion of entity types that could qualify as an accredited investor to include (i) limited liability companies with $5 million or more in assets and not formed for the purpose of investing in the offered securities, (ii) family offices with $5 million or more under management and their family clients, (iii) registered investment advisers and certain exempt investment advisors, (iv) rural business investment companies, and (v) certain entities that hold investments (as defined in the Investment Company Act of 1940) of $5 million or more and not formed for the purpose of investing in the offered securities, which entities could include labor unions, government funds, foreign entities and Indian tribes; and
- the insertion of the term “spousal equivalent” in the definition’s net worth test.
The SEC also adopted related amendments to Securities Act and Exchange Act rules.
Qualified Institutional Buyer
To increase the liquidity of restricted securities, in 2012 the SEC adopted Rule 144A of the Securities Act which facilitates enhanced trading of restricted securities by investors other than the original issuer. Rule 144A provides a safe harbor exemption from registration for the sale or resale of restricted securities to qualified institutional buyers, commonly referred to as “QIBs”. Generally, QIBs are sophisticated institutional investors that own and invest on a discretionary basis at least $100 million in securities of non-affiliated issuers.
Yesterday’s amendment to the QIB definition broadens the scope of institutions that are eligible to participate as QIBs in 144A unregistered offerings. The amendment adds the following new institution types that may be eligible for QIB status, subject to satisfaction of the securities ownership and investment threshold: (i) limited liability companies, (ii) rural business investment companies, and (iii) institutional accredited investors under Rule 501(a) of Regulation D.
The SEC’s final rules can be found here.
Commissioner Roisman’s statement on the final rules can be found here.
For questions about these developments or assistance with any other private placement matters, please contact Nina Bianchi Skinner.
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